How Xiaomi Prices Their Phones (Business Analysis)

Xiaomi Phones Pricing Analysis

Choose one product and how can you apply all the methods of pricing to your product and advantage and disadvantage of it

Cost Plus Pricing

This is a pricing method where the average cost of producing each unit of output and added with a markup for the profit. This is usually used by distributors and marketing firms. This is a simple and quick method of calculation to quickly determine a selling price of a product and make a profit. However this fails to consider the market needs and what customers value the product to be worth and competitors might sell their version at a cheaper rate which would make the business lose market share. Since Xiaomi sells very innovative and is famous for their affordable phones, they can quickly sell their new phones by doing this method with a small mark up for profit.

Penetration Pricing

This is a method where a new product is set with a very low price to encourage customers to buy and gain a high market share. Advantage would be that because of the low price, people would tend to try out the product by buying it and cause in the company having a high sales volume meaning more revenue and at the end more profit. However drawbacks would be that gaining high sales volume does not always mean achiving high profits because of the low mark up. Customers might also perceive the product to have a low quality if the price is set too low. Xiaomi is known very well with using this method to set the price of their products. They tend to sell their products at a very low price in order to gain market share, and apparently it is working for them because they became the fastest growing technology company in the world with billions in sales. However since their markup is very low, they only profit millions of dollars compared to the billions they get in revenue.

Price Skimming

In this method, the firm sets high prices when introducing the new products to skim the maximum revenues. This means that the consumers can associate a high price product with a high value or high quality which could then enhance the brand image. This also helps the firm obtain initial high revenues that will help in covering the costs for their research and development. However a disadvantage would be that the high prices would discourage some potential customers from purchasing the product. Xiaomi could sell their flagship phones using this pricing method which will help with their brand image and reputation to increase from only catering the low and middle end market into the higher end market. However Xiaomi shouldn’t set the pricing to be too high like Apple’s products but keep the prices reasonable like Samsung or HTC.

Psychological Pricing

This method is used to play on customers’ perceptions and how customers see the product being sold. Usually this technique is used in the supermarket and department stores to create an impression of good value or a good deal for the product being purchased. An advantage would be the psychological effect of the pricing method obtains high revenues for a firm selling in larger quantities. In Xiaomi, they usually set their products with psychological pricing in mind. For example in Indonesia Xiaomi set their prices for some types of phones at a price of Rp,2,949,999 compared to setting the price of three million Rupiah. This allows them to say that their products are cheaper than three million rupiah help with selling their products to potential customers. A disadvantage is that usually the prices gets rounded up into the higher value and customers might feel ripped off after seeing the price in the receipt increase after added with tax and other fees such as shipping costs.

The Loss leader

This is when the product is deliberately sold below the cost of production to encourage sales. This is done so that customers are lured to buy other products from the company which the company sets in a higher markup price to cover the loss of the item sold. The advantage for this is that if the customer decides to keep on purchasing other products that covers up the costs of the losses, the business will earn higher overall profits. A business can also use this strategy to attract consumers of a product to switch brands into their brand instead of buying the competitor’s brands. However this method could be accused by the competitors of using unfair business practices. For example Xiaomi could sell some of their entry-level phones by doing loss leader method and then setting the price of the essential phone accessories (headphones, charger, battery, case etc.) at a higher price to cover the loss of the item sold.

Price discrimination

This method works by charging different prices for the same product in different markets. This changes in price are done to adapt situations when the cost of the product changes, competitive activity changes, and marketplace changes. An advantage for the business is that the company could use price discrimination to set prices as high as possible to as much profit as possible in the peak optimum times where the business is selling the best. A disadvantage however would be that in a market with elastic demand the sales revenue could be lower. Xiaomi uses price discrimination in different countries where they tend to set lower prices in Indonesia and India because of the demand of more affordable lower-end devices. However in other countries that doesn’t really demand lower end and affordable phones Xiaomi tend to set a higher price when selling their products.

Competitive Pricing

A method where it tries to match the competitor’s price. An advantage would be that customers could benefit from the lower prices especially in the competitive market and that some higher end items could gain a higher sales profit because the company would set their price similar to more reputable competitors. However a disadvantage would be that predatory pricing is unethical business method and is sometimes illegal because it is used to restrict the competition. Since Xiaomi is growing exponentially and its reputation and brand image is improving around the world, the business could use competitive pricing to compete with bigger companies such as HTC or Sony and it might even reach Samsung soon.

Examine how profit and revenue is affected by the pricing methods

Profit and Revenue is affected by the pricing methods because the pricing method that a company or business picks directly affects the amount of revenue a company will receive at the end. For Xiaomi, the business is known for using penetration pricing to sell their products. At the end since their markup is very low, they only profit millions of dollars compared to the billions they get in revenue. Therefore the business should be careful on picking out the pricing methods and diversify these methods on different products to earn as much revenue and profit as possible.